Combining financial accounts offers simplicity

Sunday

Mar 2, 2014 at 2:00 AM

Over time, it is easy for our personal lives to get complicated with clutter. Just as a home can become filled with things that either are no longer needed or still have value but need a proper place for safe-keeping, people's financial lives can also get bogged down with accounts and investments scattered in so many places that they become difficult to manage.

David T. Mayes

Over time, it is easy for our personal lives to get complicated with clutter. Just as a home can become filled with things that either are no longer needed or still have value but need a proper place for safe-keeping, people's financial lives can also get bogged down with accounts and investments scattered in so many places that they become difficult to manage.

True, there may be some good reasons to maintain financial accounts at different banks, brokerage firms or other custodians. Keeping cash balances below the $250,000 FDIC insurance limit at any one bank is a prime example. However, when taking full advantage of the FDIC limit is a concern, it is still possible to simplify without losing this safety by using different forms of account registration, or by purchasing insured bank certificates of deposit through a brokerage account. This can help make your financial life easier to manage, leaving you better equipped to ensure that your money is working as hard as it can toward helping you reach your financial goals.

This also holds true for retirement accounts that have a way of becoming scattered over time as people move from job to job and either leave balances behind in their old 401(k), or end up with several IRA rollover accounts holding funds they have transferred out of 401(k) plans. Add in retirement accounts that have been inherited from a loved one and your financial picture can easily become more complex. To simplify things, it may be possible to combine some of these accounts, but it is important to know which accounts can be consolidated, and which must be kept separate.

To start, traditional IRA accounts that you own can be combined in one place for ease of management. Separate Roth IRAs in your name can also be consolidated. However, you cannot combine your traditional IRAs with your Roth IRAs without performing a Roth conversion — moving funds from a traditional IRA to a Roth IRA and paying tax on any pre-tax contributions that you have made to your traditional IRA accounts.

Moving funds from a "rollover" IRA to a "contributory" IRA is also perfectly fine. So-called rollover IRAs are accounts that have been funded solely with funds coming from a qualified retirement plan like a 401(k). Prior to a recent law change, only funds from rollover IRAs could be moved back into a qualified plan at a new employer. Now, moving pre-tax funds from a traditional IRA to a 401(k) plan is allowed regardless of whether the funds in the IRA are rollover contributions or regular annual contributions.

These days, the only reason to keep a rollover IRA separate is for a slightly different level of protection in the event of a bankruptcy. Qualified plans receive unlimited protection from creditors in bankruptcy situations. This unlimited exemption extends to rollover IRAs because those funds can be traced back to a qualified plan. Contributory IRAs come with a bankruptcy exemption of $1 million. So, when protecting your retirement assets from creditors is a concern, it may be wise to keep your rollover IRA separate from any contributory accounts.

Inherited IRAs offer a few challenges. IRAs inherited from the same non-spouse decedent can be combined. However, because these accounts must be titled in the name of the original account owner, with you as beneficiary, you cannot combine accounts inherited from different owners.

When inheriting an IRA from a spouse, it is possible to treat the IRA as your own and consolidate the balance with an existing IRA. However, if your spouse was younger, or there is a chance that you will need funds from the IRA before reaching the magic age of 59½, it may be better to treat the account as an inherited IRA and leave it separate. Taking this approach can enable you to delay taking required minimum distributions if you do not need immediate access to the money, or, if you do need the funds for cash flow and are younger than 59½, avoid the 10 percent penalty on early withdrawals. This penalty does not apply to distributions after death, so a young widow or widower can avoid this extra tax bite by leaving the deceased spouse's IRA as a separate account.

David T. Mayes is a Certified Financial Planner professional and IRS Enrolled Agent at Mackensen & Company, Inc., a fee-only advisory firm in Hampton. He can be reached at 926-1775, david.mayes@mackensen.com or by visiting www.mackensen.com.

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